Embedding cultural change

Finance | Fri 15 Nov | Author – Business & Finance
Darina Barrett

Risk management is a core capability for all financial services organisations. Applying this framework to management of talent risk is a source of competitive advantage in a post-crisis world, writes Darina Barrett, head of Financial Services, KPMG Ireland.

It is widely argued that fundamental culture change is needed in banks if the lessons of the crisis are to be learned and if a more stable, publicly-acceptable banking industry is to emerge. But calls for culture change are commonplace. What is rarer is successful implementation. What are the key principles and practical steps which need to be followed? And what can we learn from applying a risk-focused lens to the people agenda to improve performance and manage reputational and talent risk?

Five years after the crisis, the financial sector is still being hit by a series of revelations of unacceptable and inappropriate behaviour, market manipulation and mistreatment of customers. It is clear that historical practices were wrong, and need to be changed. A fundamental change in culture and behaviour is an essential step on the road to rehabilitation and the creation of a sustainable and safer financial sector for the future.

The misalignment of interests and flawed staff incentives that drove past behaviour have come under intense scrutiny. Discussions in the media and elsewhere focus on the ethics of bankers and the need to reshape behaviour, notably by reducing bonuses. For regulators, a priority is to ensure that banks deliver better outcomes for customers. In response to regulatory pressure, banks are beginning to undertake significant reorientation of their business models and their treatment of customers. The conduct agenda, especially in the European context, is driving a need for widespread culture change.

Hand in hand with cultural change comes the need for financial services organisations to more effectively understand, monitor and manage talent risk. For a sector so familiar with risk management as a discipline, the extension of the existing risk framework and practices to incorporate people and talent is a powerful way to underpin lasting cultural change.

Current landscape

Many global banks have started top to bottom cultural change programmes. This approach often includes: clear and public commitments from the chairman and CEO that the old ways of working are not acceptable, and that the journey towards a ‘new bank’ will include major culture change. There are often new, high profile value statements and codes of conduct usually including a principle of ethical, responsible banking and the importance of fair and quality service for customers. A redefinition of the skills and behaviour needed to deliver the business strategy is usually reinforced especially in an environment focused on risk management, transparency and ethical behaviour and reformed mechanisms (e.g. reward structures) to stop unwanted behaviour being reinforced through misaligned reward and promotion processes.

What is needed?

Most importantly, banks need to regain trust with regulators, customers and the public.

This involves building new relationships with customers and regulators. Laying the foundations of trust will depend on providing more transparency, simplified products and better quality advice, regardless of the sales channel.

In addition, banks need to show that the root causes of the behaviour that caused the crisis are being addressed, by proving they are re-balancing stakeholder interests when making core business decisions. Previously, banks demonstrated a disproportionate focus on profit at the expense of benefits to the customer. In future, successful, sustainable business models will be built on the fair balance of stakeholder interests. Banks need to prove to the public and regulators that this principle has been embedded in the entire value chain from strategy to product development to sales and after sales.

Practical steps

What does achieving cultural transformation mean in practice? At a minimum, there needs to be:

  • Senior commitment: a true commitment from senior executives to transformational change, including a review of the core beliefs and routines that exist within the bank. To be effective it is vital to have visible and authentic role-modelling of values, with leadership demonstrating decisive action to prevent the re-emergence of unacceptable behaviour.
  • A structured approach to managing people risk: what are the critical functions and roles – the areas of the organisation with the biggest impact on performance or reputation? What is the succession pipeline (internal and external) like for these areas? Is the organisation’s key talent in the critical roles and functions?
  • Incorporation of talent risk into wider risk management governance and reporting: If people risk being monitoring in the same way and in the same forums as operational, market or credit risk? Does it have visibility outside the HR function?

Successful and credible cultural transformation will depend on two elements:

  • Statement of intent: The change journey should start with some high impact, symbolic actions that demonstrate that the bank is taking culture change seriously, and that there is no going back. These symbolic actions could include: cessation of certain business activities and/or the sale of certain products that are perceived to be contentious or unfair and a radical overhaul of traditional norms and routines (e.g. no longer paying bonuses or the introduction of the bonus-malus).
  • Conduct must be embedded: Articulate clear measures, making it easier for peers and the public to hold banks to account and frame the behaviours that should be rewarded through incentive structures.

Financial services organisations are facing unprecedented pressure to change their culture.

Half-measures will not be enough in today’s environment. Real and lasting transformational change to re-establish trust in the banking sector and monitor and manage talent risk will require bold actions. It is essential that the industry does what it takes to achieve this so that it can continue to provide a valuable – and valued – role in supporting the economy and wider society.

Risk management is a core capability for all financial services organisations. Applying this discipline and framework to the monitoring and management of talent risk is a source of potential competitive advantage in a post-crisis world.

This article was originally developed for KPMG’s Frontiers in Finance www.kpmg.com/frontiersinfinance